There’s considerable debate regarding whether or not the U.S. economy is in a recession. GDP data indicate that the answer is “yes,” but other recent economic data points run counter to that claim.
What’s not up for debate is the enviable track record of dividend-paying stocks against the backdrop of economic contraction. As it is, dividend stocks and the related exchange traded funds are outperforming the broader market on a year-to-date basis, indicating that now is an appropriate time for investors to consider ETFs such as the VanEck Morningstar Durable Dividend ETF (DURA).
DURA tracks the Morningstar U.S. Dividend Valuation Index. The aim of that benchmark is compelling, as it’s designed to deliver exposure to companies offering big dividends coupled with financial sturdiness. DURA’s methodology is relevant today because high-dividend strategies are outperforming this year and because some high-dividend stocks later become payout offenders, confirming the ETF’s emphasis on financial health is an attractive trait for long-term investors.
“Companies that generate enough excess cash flow to pay regular dividends tend to be less risky because their financial results are inherently more stable. In addition, the dividend itself can provide a cushion against downside risk. All else being equal, companies that pay dividends will have less downside risk because dividend payments can partially offset price declines,” wrote Morningstar analyst Amy Arnott.
Proving its mettle in a rough 2022 market environment, DURA is down just 4% year-to-date compared to a 13.39% loss for the S&P 500. Additionally, the VanEck sports a dividend yield of 3.12%, or more than double the 1.46% found on the S&P 500.
For long-term investors and fans of market history, DURA could be steady or, at the very least, less bad than the broader market if a traditional recession comes to pass.
“Dividend-paying stocks fared better than the market overall in the economic slowdowns that started in July 1981, March 2001, and December 2007. What’s more, they did so by significant margins in two out of these three periods,” added Arnott.
Home to 81 stocks, DURA features the right sector mix to navigate economic contraction, as the fund devotes 44.1% of its weight to defensive healthcare and consumer staples names. The ETF is also a decent play on the ongoing growth of technology dividends, as that sector represents 11.4% of the fund’s roster. Looked at differently, DURA allocates 55.5% of its weight to three sectors with stellar dividend growth reputations, indicating that the fund has inflation-fighting credentials, too.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.